With the Budget just over a week away, the Chancellor John Healey has made his biggest call yet by ruling out an increase in capital gains tax (CGT).

The i Paper first reported last week that Healey had decided against raising the tax.

CGT is which is paid on the profits made from the sale of assets such as second homes and shares. It currently sits at 18 per cent for basic-rate income taxpayers and 24 per cent for higher and additional-rate taxpayers.

Senior Labour figures, such as the First Secretary of State Louise Haigh and Defence Secretary Wes Streeting, have previously supported raising CGT to create a closer balance between taxes on income and wealth.

However, Healey has opted not to increase CGT on 28 October over fears it could result in the Treasury losing money.

Why Healey decided against raising CGT

CGT is relatively easy to avoid paying as a tax because people can simply choose not to sell their assets. It can also be avoided if people relocate abroad, and there were concerns in No 11 that increasing it would lead to an exodus of wealthy individuals and deter investment in the UK.

Treasury officials believe the current tax rates are at the optimum levels for generating revenue, T understands.

Healey hinted that he would leave CGT alone in a speech last month in which he defended businesses’ ability to make a profit. “I want to see this country as a country of wealth creation. I want our government decisions and policies to raise the levels of confidence, and investment, and profit in British business,” he said. 

Tax hike on banks

The decision to forego a CGT rise means that Healey’s biggest revenue raiser on 28 October is set to be higher tax on banks – a decision which is now understood to be locked in for the Budget.

There are a couple of ways the Chancellor could approach this. The first would be to increase the surcharge that banks pay on corporation tax.

In 2023, Conservative chancellor Jeremy Hunt reduced this surcharge from 8 per cent to 3 per cent while increasing the headline rate of corporation tax from 19 per cent to 25 per cent.

Healey could reverse Hunt’s surcharge cut, which would raise about £2bn.

Another option would be to increase a tax called the bank levy – a small percentage charged on loans.

So how would this affect customers?

Increasing taxes on banks could hit consumers if banks respond by raising mortgage rates and cutting savings rates. If the taxes reduce profits, the banks may decide to recuperate some of the losses by changing these rates.

Alper Kara, a professor of economics, finance and accounting at Brunel University, told The i Paper: “Banks may try to protect their profitability through less generous savings rates, higher rates on new mortgages and loans, or increased fees.”

However, Kara said that competition between banks would “limit their ability to do this”, adding: “The mortgage market is highly competitive, while digital banks and newer entrants give savers alternatives to established banks. Banks offering poorer deals risk losing customers.”

He said that customers who could be most affected would be savers “who rarely switch”.

Adam French, head of consumer finance at Moneyfactscompare, said that “history teaches us that additional taxes ultimately find their way to customers”, but that the effect in the current climate is “likely to be marginal”.

In a low-interest rate environment customers might feel the effects of an extra tax more, he said, but the current situation with high rates may allow banks to shoulder extra costs.

French said: “Assuming we settle into a higher interest rate environment than we experienced through much of the 2010s and early 2020s, banks should have more breathing space to absorb a tax increase than they did when rates were close to historic lows.”

Putting up bank taxes could also affect those who hold shares in UK banks. Some people invest individually in the big four – HSBC, Barclays, Lloyds Banking Group, and NatWest Group – but many will also invest in them without realising, for example if they own a FTSE tracker fund in their stocks and shares ISA or their pension.

The big four banks represent close to 15 per cent of the total weight of the FTSE 100 – the index of the 100 largest firms listed in Britain. They have seen their share price dip since August as speculation that they could face extra taxes has increased.

Andrew Hagger, founder of personal finance website Moneycomms, said: “Customers with bank shares may see a dip in the share price and potentially the level of dividends paid out. Those with bank shares as part of a stocks and shares ISA or a pension portfolio may see a slight impact but nothing to get too worried about.”

Some people may also indirectly benefit from Healey’s tax raid on banks, because the Government is understood to be planning to use some of the proceeds to fund cost of living support measures.

This support is likely to be targeted and time-limited, but it could involve some households receiving extra help with ougoings such as energy bills.